Apple’s $1B Media Budget Might Help in Spotify Battle, Says RBC

By

Tiernan Ray

Aug. 21, 2017 10:40 a.m. ET

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RBC Capital’s Amit Daryanani late yesterday issued a note to clients suggesting Apple’s (AAPL) rumored $1 billion budget for “content” could help the company’s effort to compete with Spotify, the privately held streaming music service, in addition to building Apple’s services business.

Daryanani, who has an Outperform rating on Apple stock, and a $176 price4 target, takes as his cue the report last Wednesday by The Wall Street Journal’s Tripp Mickle stating that Apple has “set a budget of roughly $1 billion to procure and produce original content over the next year,” citing multiple unnamed sources.

The article suggests that the effort would be run by former Sony (SNE) execs Jamie Erlicht and Zack Van Amburg, whom Apple hired in June, and that the budget might be spent on acquiring as many as 10 TV shows.

But Daryanani thinks this isn’t about TV, and competing with Netflix (NFLX), as much as it’s about Apple’s Apple Music business competing against Spotify.

"While a billion dollars appear small relative to Netflix’s $6B, Amazon's ~$4B and HBO’s $2B annual content spend, we think that Apple is not competing with these services, at least not yet."

"Instead, the investment makes more sense in our view from the perspective of Apple Music taking share from Spotify."

Daryanani opines that "double digit growth in music streaming subscribers” offers enough “upside” in market share for Apple to justify a big spend on music content.

"Ultimately, we think the investments fit well with AAPL’s goal of doubling Services business by 2020."

Daryanani doesn’t say what he thinks Apple would do with the money, but he gives a rundown of how Apple Music stacks up against Spotify:

Apple Music has 27M subscribers vs. ~50M paid Spotify subscribers. (a.) Content: Apple Music has a larger catalog and has struck more exclusive deals with artists. (b.) AAPL allows integration with iTunes library. (c.) Social features: Presently, only Spotify allows users to share playlists and see their friends' music but with iOS11 launch Apple Music would offer similar features. (d.) Music discovery: Apple uses curated playlists and Beats 1 radio. Spotify appears to have a slight advantage with multiple tools like Release Radar, New Music Friday, and personalized Discover Weekly playlist. (e.) Pricing is essentially the same though Spotify offers a free service with ads.

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"While it's background noise for investors in the near-term, with the News Feed overhaul and other actions that Facebook has implemented over the past few months, its clear with more 'heat in
the kitchen from the Beltway' that further modest changes to their business model around advertising and news feeds/content could be in store over the next 12 to 18 months," analyst Daniel Ives wrote.

Apple’s $1B Media Budget Might Help in Spotify Battle, Says RBC

RBC Capital’s Amit Daryanani late yesterday issued a note to clients suggesting Apple’s (AAPL) rumored $1 billion budget for “content” could help the company’s effort to compete with Spotify, the privately held streaming music service, in addition to building Apple’s services business.

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